ITALY could be heading for recession as the state proceeds with sweeping budget plans and because of its feud with Brussels over EU financial rules, leading economists have sensationally claimed.

Europe has been put on high alert as risk spreads on 10-year Italian debt have been pushed to a five-year high of 290. Its debt currently stands at £2tn (€2.3tn) - equivalent to more than 130 percent of GDP.

Markets have become increasingly nervous over the country’s recently appointed coalition government’s plans to introduce huge tax cuts and welfare spending in its forthcoming budget.

Over recent weeks, the Lega and Five Star Movement partnership has also threatened an all-out fight with Brussels over more funding.

The country’s debt trajectory is vulnerable to any change in the speed of nominal GDP growth or shift in the financial forecasts.

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Spreads have doubled by 175 basis points in just four months, mirroring the pattern in the lead up to the economic crisis in 2011 that took hold of the country and Carlo Cottarelli, former boss of Italy’s spending review, fears a repeat of that.

He told the Daily Telegraph: “We had better hope that the international outlook remains favourable, because if there is any inflexion in the cycle and our debt ratio starts to rise again, nothing will save us from a jump in spreads to 500-600 points.”

In IHS Markit’s latest monthly report, the manufacturing gauge for Italy was recorded at 50.1 in August - only just above the 50-mark which indicates steady output.

IHS Markit Director of Economic Indices Paul Smith warned: “Unless we see a pick-up in demand – be it from at home or abroad – the recent trends in the data raise the spectre of the sector tipping into technical recession during the second half of 2018.”

In a further cause for concern, Bank of America has warned that Italy’s GDP growth is “flirting with zero” in the third quarter of 2018, adding that risk spreads could “easily rise to 400 basis points” if the country’s budget breaks financial rules.

Italy crisis: Matteo Salvini and his government have feuded with Jean-Claude Juncker and Brussels (Image: GETTY)

On Friday, credit rating agency Fitch changed the outlook for Italian debt to "stable" to "negative", citing concerns about the populist government’s “new and untested nature” and its promises to hike spending.

It warned: “Fitch expects a degree of fiscal loosening that would leave Italy’s very high level of public debt more exposed to potential shocks.”

The government’s flat tax plans would cost £45bn (€50bn) a year and a basic income for the poor would set Italy back £15.3bn (€17bn), while a pension reform would cost (£7.2bn) €8bn with a suspension in VAT rises costing 0.7 of GDP.

That would see Italy heading in the wrong direction when it should be achieving consolidation of one percent of GDP each year.

Italy’s showdown with Brussels is poorly timed as well, with the European Central Bank slowing down the rate of its purchase of sovereign bonds before the end of this year.

Any further intervention after January 2019 would require Italy to be bailed out by the European Union under the European Stability Mechanism, which operates under public international law for all eurozone member states.

Mr Cottarelli claimed that if the coalition government proceeded with its radical spending plans and continues to ignore warnings from credit agencies, nobody will lend it money if it finds itself needing a bailout.

Italy’s Finance Minister Giovanni Tria warned the country would suffer “repercussions” when quantitative easing (QE) ends - an expansionary monetary policy whereby central banks buy predetermined amounts of government bonds in order to stimulate the economy.

Interior Minister Matteo Salvini said over the weekend that Italy would “gently brush” the three percent limit of GDP of the Maastricht criteria - a set of rules that EU member states need to meet to enter the third stage of the Economic and Monetary Union.

But Lorenzo Codogno from LC Marco Advisors warned: “It is deliberate manipulation. They know that three percent doesn’t matter.

“I think they are testing the waters to see how Brussels reacts, and what happens in financial markets.”

But the warning signs are clear - Italy is not a net contributor to the EU budget and has the power to inflict a systemic crisis for the monetary union.

Mr Salvini is a renewed eurosceptic and has made no secret of trying to pull Italy out of the euro, arguing that the European Central Bank used the spreads as “a weapon of mass financial destruction to usurp Silvio Berlusconi in 2011.

Lega economist and head of the Parliament’s budget committee Claudio Borghi, told the Daily Telegraph last month: “They can’t play the same trick twice. Italians know who controls the spreads.

"We’re back where we were when the crisis began in 2011. There are only two golden keys to get out of this slaughterhouse: either the ECB agrees to hold the risk spread at 150 points; or we take back our own currency and restore national independence.”